Valuation multiple on EBITDA or cash flow?

by a searcher from Indian Institute of Management Bangalore

2 years ago

Hi all, I'm looking at a deal in the B2C services space with good EBITDA margins and minimal capex. There's no interest and minimal depreciation so the tax impact is pretty high which reduces cash flow. Let's assume there's no working capital needs. I'm wondering how people look at valuing such deals - traditionally people quote multiple of EBITDA but in this case, if I pay say 5X EBITDA, it'll be more like 6.5-7X post-tax cash flow. I understand everything is a negotiation, but trying to understand how 1) acquirers, 2) equity investors and 3) banks think about numbers for such deals.

Thank you!

4 likes
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4 comments

professional from University of Southern California - Marshall School of Business

Warren Buffett says, “People who use EBITDA are either trying to con you or they’re conning themselves.” Charlie Munger, Buffett’s right-hand man, goes even further: “I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit’" Strong words from some of the most successful businessmen on the planet.

1 year ago | like reply | 0 likes

searcher from Dartmouth College - Tuck School of Business at Dartmouth

Is the tax landscape fairly static or do you expect changes? If the tax burden will be significantly higher in the future that will affect your cash flows and the valuation of your business. You have more control over operating items than over tax rates.

2 years ago | like reply | 1 like

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